Experimental feature

Listen to this article

Experimental feature

If you have an opinion about the UK’s FTSE 250, or FTSE 100 index or if you want to hedge yourself against their movements, the International Securities Exchange has developed a set of options contracts designed to allow you to do just that. You could even use them to place bets on the British market.

The index options products launched by the ISE in concert with FTSE are intended for retail and institutional investors. Early interest has been displayed by both groups.

The ISE, an entrepreneurial exchange that has led development of equity options in recent years, hopes to capitalise on retail interest in international investing.

The recently launched index options based on the FTSE 250, which sit alongside the equivalent product for the flagship FTSE 100 index, launched this month, will trade through a so-called “mini” contract structure.

In such structures the mini FTSE 250 index represents a 10th of the value of the full-size FTSE 250 index. That makes them ideal for retail investors.

The FTSE 250 serves as the main mid-market measure of the UK market – it is a weighted index of the most highly capitalised companies listed on the London Stock Exchange outside the flagship FTSE 100.

Constituents for the new FTSE 250 mini contracts will therefore be selected quarterly as the 101st to 350th largest companies listed on the exchange. These are exactly the kind of securities that can be difficult to research from the US, and where broader derivatives-based exposure makes sense.

Timber Hill, a subsidiary of Interactive Brokers, will serve as the primary market maker in the options, which will take the form of cash-settled index options.

The exercise-settlement value of the options contracts (known as the Exchange Delivery Settlement Price, or EDSP) is calculated by the LSE’s intra-day auction of all component securities on the third Friday of the expiration month, and published at about 5:30am New York time.

The exercise-settlement amount is equal to the difference between the exercise-settlement value and the exercise price of the options, multiplied by $100. If you exercise the options, cash ought to be delivered on the business day following the expiration of the option.

The aggregate position and exercise limits are 250,000 mini contracts on the same side of the market with no more than 150,000 mini contracts in the current month. Ten mini contracts are equivalent to one full-size contract.

An index options hedge exemption – which allows public customers up to an additional 750,000 mini contracts if they can prove that they have diversified portfolios – could expand the possibilities for the truly wealthy.

The action represents the first time FTSE 250 options have traded electronically in the US.

Bruce Goldberg, chief marketing officer at the ISE, said: “With the increased demand for global diversification and risk management trading strategies by both retail and institutional investors alike, we believe this product provides an innovative investment and trading strategy that is both affordable and easy to use.”

He added that although US investors were obviously a large part of the target market, the products were formed with a global view. “This is part of our ongoing strategy to expand our business in the US but we are very conscious that today’s markets call for global trading on a global basis.”

“This gives investors – and we have seen interest from both retail and institutional investors – a dollar-denominated way of hedging or taking a position in the FTSE 250.”

ISE has developed advanced screen-based trading systems for a variety of options and in May 2000 became the first fully electronic US options exchange.

It has even announced plans to extend beyond its traditional realm of options and to launch a new stock exchange that would trade in cash equities – a development that attracted support from several big Wall Street backers.

In a busy week, it has also introduced another suite of options products – known as Quarterlies – that will expire at the end of the calendar quarter.

Options currently expire on the Saturday following the third Friday of each month. ISE developed the new product in response to a desire from traders for an alternative structure that would allow options to expire at the end of each calendar quarter – the periods used by almost all fund managers when reporting performance figures.

“Our members have asked us to develop an alternative expiration structure to line up options expiration to their equity trading practices,” said David Krell, president and chief executive officer of ISE.

“As a result, we have developed a new options trading product that provides them [with] the flexibility of quarterly expirations.”

How interesting are the new FTSE options? The UK does not bring with it the growth and volatility prospects of emerging markets. But it has out-performed the US in recent years. This is probably a useful addition to the arsenal of internationally minded retail investors.

Get alerts on Markets when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.

Comments have not been enabled for this article.

Follow the topics in this article